Reporting requirements of foreign trust with a U.S. grantor or beneficiary

Question:

An asset-protection attorney claims that a foreign grantor trust, with foreign trustees, but with a U.S. settlor and U.S. beneficiaries is considered a "grantor trust" in which case, no Forms 3520 or 3520A (related to foreign trusts) would be filed. Is this true?

Answer:

The asset-protection attorney is wrong. A U.S. person who is considered the owner of a foreign trust under any of the grantor trust rules is the one responsible for the requirement that the foreign trust file an annual return (Form 3520-A). The trust must provide an accurate accounting of all trust activities, trust operations and other relevant information required by the Treasury. See IRC Sec. 6048(b)(1). In addition U.S. beneficiaries of a foreign trust who receive trust distributions, either directly or indirectly, are required to file Form 3520, reporting the distributions on Part III of that form. The reporting requirement is limited to U.S. beneficiaries who know or have reason to know that the trust is foreign.